Forwards and Futures - Instrument Basics › Contract Specifications and Common Underlyings
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Futures exchanges offer contracts on a diverse range of underlying assets. Understanding the specifications of each contract is essential for trading.
Stock Index Futures
Stock index futures allow traders to gain exposure to broad equity markets without owning individual stocks. The most actively traded index futures include:
- E-mini S&P 500 (ES): Tracks the S&P 500 index with a contract multiplier of $50 per index point. If the S&P 500 is at 4,500, one contract has notional value of $225,000.
- Nasdaq-100 (NQ): Tracks the Nasdaq-100 index with a $20 multiplier.
- Russell 2000 (RTY): Tracks small-cap stocks with a $50 multiplier.
Index futures are cash-settled because physical delivery of 500 stocks would be impractical. At expiration, the final settlement price is determined by a special opening quotation (SOQ) that uses the opening prices of all index constituents. The calculation below demonstrates how to analyze the leverage and sensitivity of an E-mini S&P 500 position:
# E-mini S&P 500 futures example
index_level = 4500
multiplier = 50
contracts = 5
notional_value = index_level * multiplier * contracts
margin_per_contract = 12000 # approximate initial margin
total_margin = margin_per_contract * contracts
leverage = notional_value / total_margin
# Sensitivity analysis
move_pct = 0.01
pnl_change = notional_value * move_pct
margin_impact_pct = pnl_change / total_marginE-mini S&P 500 Futures Position Analysis ============================================= Index level: 4,500 Contract multiplier: $50 Number of contracts: 5 Notional value: $1,125,000 Initial margin: $60,000 Leverage ratio: 18.8x --------------------------------------------- Sensitivity (1% move): $11,250 Margin impact: 18.8% of margin
Futures trading involves substantial leverage, which requires careful management. A 1% move in the S&P 500 represents a $11,250 gain or loss on this position, representing nearly 19% of the margin posted. This leverage amplifies both gains and losses. If you control $1,125,000 in notional equity exposure with only $60,000 in margin you have tremendous profit potential but also face the risk of losing your entire margin (and more) in a significant market move.
Key Parameters
The key parameters for the futures position analysis reveal the mechanics of leverage:
- Index Level: The current value of the S&P 500 index (4,500). This determines the baseline notional exposure when multiplied by the contract multiplier.
- Multiplier: The dollar value per index point ($50). This scaling factor translates abstract index points into concrete dollar amounts. Different index futures use different multipliers to achieve desired contract sizes.
- Contracts: The number of contracts held (5). Position sizing determines total exposure and should reflect your risk tolerance and capital base.
- Initial Margin: The total collateral posted for the position. The ratio of notional value to margin determines leverage, which in this case exceeds 18x.
Commodity Futures
Commodity futures originated with agricultural products and have expanded to include energy, metals, and other physical goods:
Energy contracts:
- Crude Oil (CL): 1,000 barrels per contract, physically settled at Cushing, Oklahoma
- Natural Gas (NG): 10,000 MMBtu per contract, delivered at Henry Hub
- Heating Oil (HO): 42,000 gallons per contract
Agricultural contracts:
- Corn (ZC): 5,000 bushels per contract
- Wheat (ZW): 5,000 bushels per contract
- Soybeans (ZS): 5,000 bushels per contract
Metals contracts:
- Gold (GC): 100 troy ounces per contract
- Silver (SI): 5,000 troy ounces per contract
- Copper (HG): 25,000 pounds per contract
Commodity futures have additional complexities including storage costs, quality specifications, and delivery point optionality. For example, COMEX gold futures allow delivery of gold bars meeting specific purity standards at approved vaults in New York.
Interest Rate Futures
Interest rate futures provide exposure to bond prices and interest rates:
- Treasury Bond Futures (ZB): Based on a notional $100,000 face value bond with a 6% coupon
- Treasury Note Futures (ZN): 10-year Treasury notes
- Eurodollar Futures (GE): Based on 3-month LIBOR rates (being replaced by SOFR futures)
- Fed Funds Futures (ZQ): Based on the effective federal funds rate
Treasury futures use a conversion factor system that allows delivery of various bonds while maintaining contract standardization. The "cheapest to deliver" bond optimization adds an additional layer of complexity to these contracts. Understanding the pricing mechanics requires familiarity with how Treasury futures quote prices in 32nds of a percentage point:
# Treasury futures pricing example
face_value = 100000
quoted_price = 112.50 # as percentage of face value
contract_value = (quoted_price / 100) * face_value
# Tick value calculation
tick_size = 1 / 32 # Treasury futures trade in 32nds
tick_value = (tick_size / 100) * face_value10-Year Treasury Note Futures (ZN) ======================================== Face value: $100,000 Quoted price: 112.5% of par Contract value: $112,500.00 Tick size: 1/32 of 1% Tick value: $31.25
The calculated tick value of $31.25 indicates that each 1/32 price movement results in a profit or loss of $31.25 per contract. This convention of quoting in 32nds dates back to the pre-decimal era of Treasury trading and persists today because it allows for finer price gradations than decimal pricing would easily permit.
Key Parameters
The key parameters for the Treasury futures pricing illuminate the relationship between price quotes and dollar values:
- Face Value: The notional principal amount of the bond ($100,000). This represents the par value that the bond would pay at maturity and is the base for calculating contract value.
- Quoted Price: The market price expressed as a percentage of par. A quote of 112.50 means the contract is trading at 112.5% of face value, which reflects both the bond's coupon payments and prevailing interest rates.
- Tick Size: The minimum price increment (1/32 of a point). Treasury futures trade in 32nds, so a move from 112-16 to 112-17 represents a one-tick change. This convention allows for precise price discovery in highly liquid markets.
Currency Futures
Currency futures trade on the CME and provide exposure to exchange rates:
- Euro FX (6E): €125,000 per contract
- Japanese Yen (6J): ¥12,500,000 per contract
- British Pound (6B): £62,500 per contract
Currency futures are quoted in U.S. dollars per unit of foreign currency and are used by corporations to hedge international exposure and by speculators to express views on relative currency movements.